EU Sets July 2003 for Internet VAT

Companies in the United States will be required to collect value-added taxes on software, music and other online purchases delivered digitally to European residents, under a directive unanimously passed by the European Union.

The directive takes effect July 1, 2003.

Hard goods and digitally delivered products sold by European companies to European customers already are taxed. Products sold by U.S. and other non-EU companies, however, are tax-free.

The European Commission, which drafted the law, said new rules were needed to eliminate competitive distortions and that they would affect a small share of total sales. An EU spokesman said a separate measure that taxes hard goods could be considered in the future.

Direct marketers in the United States say the directive will require them to charge higher rates than EU competitors and will be difficult to enforce. The Direct Marketing Association is particularly concerned and lobbied against it.

"The European Union has now become the first industrialized country government to enslave foreign businesses to collect taxes on their behalf," said Charles Prescott, vice president of international business development and government affairs at the DMA.

Under the directive, non-EU companies that sell digitally delivered goods and services would have to register with a VAT authority in at least one EU state, but would collect the VAT based on the customer's country. This could mean an additional charge of 15 percent to 25 percent for products sold to EU customers.

The company would remit the VAT to the country in which it was registered, and that country would distribute the tax to the customer's country.

For a customer from Belgium buying MP3 music files from a U.S. merchant, for example, the merchant would determine that the purchaser is located in Belgium and then add the appropriate Belgian VAT to the purchase.

The law would not affect digital sales to business customers, which account for about 90 percent of total sales and which already are covered by value-added tax rules in the EU.